5 reasons why the economic collapse of Puerto Rico happened

Puerto Rico Governor Alejandro Garcia Padilla confirmed that it will default on a $422 million payment Monday. He has been urging for a bailout from the Congress, warning that further defaults will lead to ruin for the commonwealth. Currently, Puerto Rico is $72 billion in debt, and the governor has repeatedly said that it will not be able to repay this amount.

United States Treasury Secretary Jack Lew has been urging President Obama, House Speaker Paul Ryan and Republicans to put forward bailout measures to save Puerto Rico as the territory discusses debt restructuring and adjustments to current deals. Will it happen? It probably will. But should it?

No matter what happens, though, credit rating agencies still view anything in Puerto Rico as a default.

Last week, John Oliver of HBO’s “Last Week Tonight” ran a segment discussing Puerto Rico’s economic collapse. Oliver, who usually dives into issues like no one else in the media today, took an unusual approach when reporting on the downfall of Puerto Rico. Rather than looking at the obvious culprit of United States territory’s crisis (the government), he blamed it on Wall Street and American business.

Oliver essentially pinned the economic and fiscal crisis on hedge funds, Wall Street and investors. Indeed, Oliver did place a small portion of the blame on some leaders, like former Governor Luis Fortuno, who tried reining in government spending, he mostly ignored politicians, bureaucrats and unions. It Isn’t Wall Street’s fault for Puerto Rico’s situation, it’s a plethora of other matters.

So what happened? Here are five reasons why the downfall of Puerto Rico happened:

Government Spending & Waste

When Puerto Rico experienced immense business migration in the 1980s and 1990s, the politicians decided to take these revenues and expand the government. As we all know, when the government collects enormous amounts of revenues, it tends to spend more than it takes in and wastes much of it.

The Puerto Rican government has presented 16 consecutive government deficits since 2000. Instead of making necessary cuts to an array of its programs, Puerto Rico has simply issued new debt to fund the payment for maturing debt. Ditto for a majority of the municipal governments as they have just sold bonds to fund their expenditures. Even with pending economic doom, officials did nothing to rein in spending, and that’s partly due to government unions (see below).

Over the years, there have been egregious examples of waste all over Puerto Rico. One of the prime examples of waste is the generous salary packages that’s given to government workers. For instance, a legislative advisor starts at $74,000, while a fitness studies professor (the government spends a lot of its budget on education) earns a starting salary of $152,000. Most government workers also receive three months vacation time and one-month paid sick leave. Oh, and government workers receive $120 million a year in bonuses.

The waste doesn’t end there. The government has opened bowling alleys and ice skating parks – in a place like Puerto Rico it’s expensive to operate ice skating parks. A lot of free tickets are handed out to this ice skating rink, too.

Why should a territory receive a bailout when it will just waste those funds in the future?

The Minimum Wage

Labor is very expensive in Puerto Rico. Thanks to the federal government in the 1970s, Puerto Rico is required to align its minimum wage to the U.S. This has been proven to be a disaster for the territory. Heck, even Keynesian economist Paul Krugman pontificated that the high minimum wage in Puerto Rico has been terrible for it.

“The heavily indebted island demonstrates the tragic consequences of forcing up the minimum wage out of sync with the market price for labor. Between 1974 and 1983, Puerto Rico was forced to increase its minimum wage in line with the federal figure, where it has remained since 1983. The results of imposing this standardized federal minimum wage have been ‘substantially reduced employment on the island,’ as well as swathes of unemployable low-skilled workers who decided to immigrate to the US mainland to seek work…”

The same report highlighted that the minimum wage decreased employment levels by as much as 10 percent and reduced the supply of labor by enhancing the qualifications businesses sought. Of course, let’s not forget this important finding: 40 percent of Puerto Rico’s adult population is employed or seeking work – compare that to the 62.4 percent in the U.S.

Thanks to the minimum wage, many Puerto Ricans have been priced out of the labor market. Many businesses can’t afford to pay such a high minimum wage. Perhaps this is why Puerto Rico has a large underground economy where minimum wages aren’t enforced and workers aren’t taxed.

For a long time, minimum wage opponents have argued that these mandated wage rates ultimately hurt the poor. Now we’re seeing its damaging effects in action.

A Dependence on Debt

As previously noted, Puerto Rico has relied on issuing new debt just to stay afloat. Puerto Rico has maintained an udder dependence on debt to maintain operations without making any sacrifices. With public debt equaling 80 percent of its gross national product (GNP), Puerto Rico is one of the most indebted places by percentage in the world.

Due to the fact that investors who acquired Puerto Rican bonds were exempt from federal, state and local taxes, the government was able to borrow large sums of money to stimulate the island economy. Also, this allowed politicians to show off to voters with immense government projects, such as the $85 million a year Urban Train metro line that just five percent of the residents use.

For years, much of these government projects were funded through debt and not through tax revenues or budget cuts. Faustian economics were surely at play in the island territory for a long period of time.

Despite the lack of jobs, declining tax revenues, a population making an exodus and a government unable to adopt the solar and wind policies its neighbors have embraced, Puerto Rico is not adapting to the situation. Any fiscal and economic crisis Puerto Rico is facing is its own fault.

In life, you have two choices: adapt or die. It seems Puerto Rico has chosen to perish.

UnionGreed

In 2009, then-Governor Luis Fortuno tried to balance the books and reduce its debt. One way he tried to do this was to cut down the size of the government and rein in government salaries. No wonder why he lost his bid for re-election! Government unions rallied in huge numbers against his proposal to lay off government workers and shut down about 40 public agencies.

Yeah, Puerto Rico has really won! Four years later, Puerto Rico is on the brink of bankruptcy, defaults and a population suffering. Good job guys!

Final Thoughts

It was perplexing to watch John Oliver’s 20-minute segment on Puerto Rico’s disastrous situation. Sure, he had a few moments of politicians’ inept decisions. However, for a majority of the segment, he lambasted Wall Street and the federal government for the territory’s mess (though he forgot to mention the minimum wage). It was difficult to watch because he blatantly omitted key facts.

Puerto Rico should not receive bailouts or any taxpayer funds. Just like California or New York shouldn’t. It’s their fault for the financial mess they’re in. Like most of us, when we’re in a tough situation, we have to make tough choices to ensure we can survive, and later on thrive. Puerto Rico has to do the same.

Comments

The minimum wage cry once again. If people are leaving the island for work and there is an underground wage system that does not follow the minimum wage, then you cannot blame the minimum wage for the problems. The government of Puerto Rico is to blame, not the minimum wage. Also, the U.S. government better learn a lesson from Puerto Rico, because the mainland is heading down the same road.